Chapter 7

• Jurisdiction: United States

Chapter 7

How to Create a Risk Assessment

There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.

—Donald Rumsfield, former Secretary of Defense

Overview

Remember the core constraints, discussed in Chapter 1, that are present in every program, project, and complex case—time, scope, and cost? The time for your high-risk, complex case is set by the court’s scheduling order. But scope and costs should be based on either the opportunity presented or risk faced by your client. To determine these core constraints—scope and cost—you must create an informed risk assessment, one that sets the value of the case.

The value is a number that factors all reasonably possible scenarios if the case proceeds to trial. Once it’s determined, you can, with your client’s input, determine the scope (what work to do) and cost (how much to spend). You can also determine a fair settlement offer or demand because you have something to compare it to—a value created by your risk assessment.

This chapter provides a method for creating a risk assessment. It also explains how I applied the method to a complex product-liability case. Finally, it discusses the benefits realized from creating a risk assessment.

The Method for Creating a Risk Assessment

Start with two major decision branches: settle and litigate

In nearly all high-risk, complex cases, there are two paths: settle or litigate. These paths are the main branches of the decision tree used in my risk-assessment method. The litigate branch has offshoot branches. These are the possible scenarios—meaning what could occur by continuing to litigate. Each scenario is assigned a result (in dollars) and a percentage. Each assigned percentage is the chance of that scenario occurring. The assigned percentages for the litigate branches must all add up to 100 percent.

Determine the value of the settle branch

A settlement offer or a settlement demand sets the value of the settlement branch. If you are defending a complex case and your opponent makes a settlement offer of $10 million, you know the amount to put into the settlement branch: $10 million. If you represent a plaintiff, haven’t received a settlement offer from the defendant and don’t expect to, then enter $0. But still prepare the risk assessment, which will inform the scope and costs components of the core constraints.

Determine the value of the litigate branch

In most high-risk, complex cases there are usually several scenarios of what can occur if the case continues. Whereas the settle branch will usually list a single number, the litigate branch, with its multiple scenarios, will have more numbers and require some basic math to arrive at the value.

First, determine all of the realistic potential scenarios on the litigate branch. Then insert a dollar result for each scenario—meaning the dollar result if that scenario occurs. Then assign a probability percentage to each scenario. The assigned percentage reflects the chance of that scenario occurring. Most important, the percentages for all of the scenarios on the litigate branch must total 100 percent. Finally, multiply the percentage by the dollar amount assigned for each scenario. So if one of your scenarios has a value of $1 million, and it is assigned a 25 percent chance of occurring, the value for that scenario is $250,000. Once the math is completed, the amounts for all of the scenarios are summed. The sum of the added scenarios is the value of your case.

When I use the words “probability percentage” for each scenario, I mean the likely outcome if the case continues and is resolved by litigation, not settlement. Is the percentage you assign something of a guesstimate? Sure. But experienced litigators and trial lawyers are paid for their...